9 Ways to protect your assets from lawsuits and creditors

If you haven't already taken steps to safeguard your assets, the time to start is right now. You cannot take these steps after the incident, that requires you to pay, happens. In fact, in many cases, such a late step would be considered a motive to defraud the creditors. So, don't wait till you are in a position to get sued.

If you purchase an umbrella policy that protects you from personal injury claims, then it has the additional benefit of the insurance company utilizing its resources to defend you. Life insurance is sometimes exempt from creditors, especially if the beneficiaries are spouse or child. If you run a business, you should also consider commercial liability insurance and worker's compensation insurance.

401K and most other employer-sponsored plan assets are beyond the reach of creditors and plaintiffs. The Employee Retirement Income Security Act of 1974 or ERISA covers it. It also covers the rollover from a 401K to an individual retirement account. The only two entities who can stake a claim are spouse, in the event of a divorce, and the federal government.

Roth IRA and Traditional IRA have a inflation-adjusted cap of $1 Million from bankruptcy proceedings. Furthermore, the bankruptcy court has the authority to increase this cap if it deems suitable.

Planning for protecting your assets should always be part of your overall financial and estate planning strategy.

If you own a home, jointly with your spouse, then that cannot be attached by creditors for just one spouse's debts. In some states, your primary residence has some protection from creditors, upto a certain square footage.

If you are a sole proprietership, then your assets are vulnerable for personal liability claims. General partnerships are even worse, because you stand to lose your assets if your business partner has problems on the business or personal front. Limited liability companies (LLC) and corporations are great avenues for asset protection. Your personal assets cannot be touched in the case of any problems with the LLC or corporation. Real estate and many other assets can be safeguarded as part of a limited liability company (LLC).

Asset protection trusts offer a mechanism to inject some of your assets into a trust run by an independent trustee. The trust can then be a source of occasional income for you. This is particularly suitable for wealthy individuals that need to protect huge assets. Asset protection trusts can be formed offshore. Some states such as Alaska, Delaware, Nevada and South Dakota also permit asset-protection trusts, and you do not even need to be resident to form a trust there.

If you pay down your mortgage, then your cash that was earlier vulnerable is now protected in the homestead, if your state laws permit that.